Investing in precious metals has become something of a craze in the past decade. Gold buyers seem to have appeared everywhere, and the price for precious metals continues to climb. There are numerous good reasons to invest in precious metals in 2013 and beyond, but there is also a high level of volatility that investors should be aware of.
Why the Focus on Precious Metals?
The precious metal market is important because it is the classic form of real money. Contrary to what most people believe, currency, such as the US dollar, is not ‘money’. It has no actual value. Its value is based on whatever the United States Government claims that value to be. The government has some control over the value of its currency, but ultimately that value is based on trust. As long as people trust the currency and the economy that backs it, the currency will remain an effective method of trade, and inflation will remain relatively small. There is the classic doomsday scenario that consumers and other nations will lose their trust in the economy and the currency all at once. This will cause massive inflation that will destroy the value of currency. Precious metals, however, have intrinsic value. No matter what happens to currency, the precious metals will always be in demand. This is due in part because they have practical applications. Gold, silver, platinum and palladium are useful in a variety of industries and applications. There is also the psychological factor. For some reason, humanity has always fallen back on precious metals as its money of choice. There is a good chance that no matter what happens to currencies, people will always accept precious metals as trade material, so they always have value.
The economic crisis has caused people to pay more attention to precious metals due primarily to the reasons above. If something does cause a widespread currency collapse, most other types of investments will become meaningless because they are ultimately back by currency. Only those who have invested in precious metals or other tangible items will have something of actual usable value.
The Day to Day of the Metal Market
While imagining a doomsday scenario where only people with precious metals have any wealth left is interesting, it is not primarily what investors should be focused on. The world’s governments work very hard to ensure that global economic collapse is averted, and most financial experts conclude that everything will be okay. The economy has fluctuations, and there are certainly challenges ahead for the system, but it is not imminently in danger of catastrophic failure. This means that rather than buying precious metals in a type of Armageddon panic mode, investors would be keen to watch the metal market closely with one thing in mind: volatility.
The metal market is by far the most volatile of almost any market. Nobody seems to have a consensus as to what cause the ebb and flow of metal prices. There are certainly many factors. Supply of precious metals is not always constant. Major mines can dry up on any given day, or new veins could be found. The economies of major gold buyers such as China also influence the demand and the price. Since supply and demand for precious metals is so difficult to regulate, the price fluctuates accordingly. A long-term graph, however, demonstrates a remarkable increase in precious metal prices over the last decade. Investors would be wise not to focus too much on the daily price of precious metals. In the short term it is almost impossible to determine a downward or upward trend in the market. There are also times such as the recent and mysterious drop in metal prices that had everyone clamoring to buy. The long-term view tells a steady story of increase that isn’t likely to change anytime soon.
The Direct Relationship Between Inflation and Precious Metals
Precious metals and currency have a very close relationship, and it is easy to identify. The value of precious metals is relatively fixed. Note that this is ‘value’ not ‘price’. Investors in precious metals are not buying promises, such as stocks or bonds. They are buying actual physical property that has a set value like all physical property. Since the value is fixed, the price fluctuates due to supply and demand forces as well as the value of currency. As the value of the currency declines, the price of precious metals goes up accordingly because it is a physical asset. Inflation is a measure of how much currency is declining. The greater inflation, the greater the price of precious metals will be in the future. If there is deflation, meaning the value of currency is increasing, then precious metals will drop in price. Under the current economic system based on borrowing and debt, however, deflation is very unlikely.
Which Precious Metals are Most Valuable?
There is much talk of gold because it is both common and expensive. This makes it easier to trade in high dollar amounts because it can be obtained quickly and still has a high price. Platinum is technically the most valuable of the four main precious metals, but since it is more difficult to acquire, it is traded less frequently. Silver is proving to be the hidden moneymaker in the precious metals market. This is primarily due to demand. Silver’s uses in industry are widespread, and the amount of investment grade silver is a much less than gold by ratio. This means that while silver is cheaper than gold per once, and it is technically of much higher availability in the ground, it is scarcer than gold on the market. All the hype of gold has shadowed silver and made it something of a secret investment. There are many advantages to investing in silver in 2013.
1) In terms of market ratio, silver is rarer than gold, so its price is more likely to climb on the market.
2) Silver is much cheaper per ounce than gold. This makes it much easier to move. A smaller investor may not be willing to invest tens of thousands of dollars in a few ounces of gold, but he may be willing to invest a thousand dollars or so in a good quantity of silver.
3) With a massive focus on gold, silver remains a metal with fewer big market forces acting on it. Its price is still volatile, but may not be as volatile as gold.
The bottom line is that investing in precious metals is a smart choice all around for the long-term investor. Those focused on short-term trades, however, would be wise to avoid the metal market completely because its volatility makes it highly unreliable for short-term investment plans.